Steve Hamilton is a Tampa native and a graduate of the University of South Florida and the University of Missouri. He now lives in northern Kentucky. A career CPA, Steve has extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.

Thursday, April 21, 2016

Wal-Mart Sues Puerto Rico Over Tax Changes

I had seen
the headline, but it was busy season and there were other priorities.

Now I have
had time to look into the matter.

I am
referring to the Wal-Mart v Zaragoza-Gomez decision. It has to do with
Puerto Rican taxes.

You may know
that Puerto Rico is a U.S. territory. I have bumped into it professionally only
a couple of times over the last dozen or so years. It simply is not a component
of my practice.

What you may
not know is that Puerto Rico has its own taxes. It is similar to a state in
that regard, but there are differences. For example, if you are a resident of
Puerto Rico you do not have to file a U.S. tax return – unless you have income
in the U.S. You then file a U.S. return, but only for the U.S. income.

Puerto Rico
however is now on the precipice of bankruptcy. They decided to bring-in more
money to the fisc by changing a tax rule or two:

·Tripling
the “tangible personal property” tax rate from 2.5% to 6.5% on purchases from
vendors located off the island.

·Eliminating
the option for the Treasury Secretary to exempt, in whole or part, a 20% tax on
services provided by related entities or by a home office upon proof that the
price charged was equal or substantially similar to the price which would occur
with an unrelated person.

There was a
problem, however: the tax, as changed, applied to only one taxpayer: Wal-Mart.

Granted, Wal-Mart
is also the island’s largest corporate taxpayer, but one would think the politicians
would employ some … deniability … before they culled the Arkansan wildebeest from
the herd. Shheessssh.

Now, 6.5% does not sound like a lot, but I
suppose one has to specify what it is being multiplied against.

·If
net profit, that would leave 93.5% of profit left over. That is pretty good.

·If
cost of sales, then we need one more piece of information.

We need to know the gross profit.

Say that you bought something for $93. You sold it for $100. Your gross profit is $7. Now you have to pay
tax. That tax is calculated as 6.5% times $93 or slightly over $6. Your profit
was $7.

That is not so good.

Wal-Mart
said that the effect of the changes was an effective tax rate of over 90%, so I
am thinking we are not too far off with the above example.

Wal-Mart did what it had to do: it sued.

The District
Court was sympathetic to Puerto Rico’s financial plight:

·It
gives us no pleasure, under these circumstances, to enjoin a revenue stream
that flows directly into Puerto Rico’s general fisc.”

·…
we, too, are citizens of this island and we, too, must suffer the consequences….”

·… we are here because … has left the
plaintiff, Wal-Mart, with nowhere else to turn.”

The
government argued that Wal-Mart would simply have to pay the tax and sue for
refund. Wal-Mart’s argument was “not yet ripe,” as it had not been denied a
refund of its taxes. Furthermore, Wal-Mart could “afford to pay” the tax.

The Court
pointed out the obvious: it would likely take a generation for the case to
resolve, at which point Puerto Rico might be as able to repay Wal-Mart as it is
to have winter sports.

This is not a remedy, but a cynical
means of extracting more unconstitutional revenue from an innocent taxpayer
without the deterrent effect of having to pay it back…,” said the Court.

The government
said it would appeal.

The judge just took away $100 million from the people of
Puerto Rico and gave it to Wal-Mart. Now I have to look for that money
somewhere else,” said Governor Alejandro Garcia Padilla.

I have no
particular sympathy for Wal-Mart, other than the deep belief that any
government desirous of being perceived as legitimate is mandated to deal fairly
with its citizenry. Taxation is especially sensitive, and this is the equivalent
of having you pay for all the new sidewalks in the neighborhood because you
have the nicest house.

About Me

Thirty years years in tax practice. It's a long time, and I have seen virtually everything short of the fabled tax-exempt unicorn. I was raised in Tampa, went to school in Missouri, taught at Eastern Kentucky University, lived in Georgia, got pulled to Cincinnati when I married, have in-laws in England and a daughter going to the University of Tennessee. I am not sure where I will wind up next, but I hope there is better weather.